SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

December 15, 2022
SGH Insight
And while Lagarde did not place a number on that elusive “terminal rate,” we believe, as we wrote in SGH 11/30/22, “ECB: A Major Disconnect with Markets,” that means the ECB is increasingly eyeing a 3.5%-4% landing zone when all is said and done.
Market Validation
Bloomberg 2/21/23

Money markets add to ECB tightening wagers, fully pricing a half-point ECB rate hike at the March 16 policy decision for the first time.
A 50bps hike is priced versus 49.5bps on Monday; 3.76% peak rate is expected by October, 4bps higher than the prior day.

Read Full Report
December 15, 2022
SGH Insight
Bottom Line: If the Fed didn’t like yesterday’s market response, we are going to start hearing about it. I don’t know, however, that market participants will react to jawboning given the view that the next few inflation numbers will be soft. They might need to see Baoard members coming out in favor of another 50bp rate hike before absorbing that message. Even then, what market participants really need is data to support the Fed’s projected policy path, and that will take time.
Market Validation
Bloomberg 12/16/22

Fed Officials Reinforce Hawkish Message on Need for Higher Rates
Federal Reserve officials, hammering home an
unapologetically hawkish message, said that they won’t relent on
tighter policy until inflation is under control.
New York Fed President John Williams and San Francisco Fed
chief Mary Daly both stressed the central bank’s commitment to
lowering inflation back to their 2% target and the need for
clear evidence of easing price pressures.
“We’re going to have to do what’s necessary,” Williams said
Friday during an interview on Bloomberg Television with Kathleen
Referring to the central bank’s forecast that rates will
peak above 5% next year, he said “it could be higher than what
we’ve written down” if that’s what it takes reduce inflation.
Read Full Report
December 13, 2022
SGH Insight
Quick CPI Note

Federal Reserve Chair Jerome Powell will welcome the inflation number as good news but will remind us that the Fed still believes it needs to maintain restrictive financial conditions for an extended period to ensure a more balanced labor market, which is key for restoring price stability. Although core services inflation was softer in November, it is too early to expect Powell will change that narrative.
The disinflationary trend will make it easier for the Fed to pause, but Powell will want greater evidence of weaker labor market conditions before he will be comfortable pausing. He will remind us that the Fed doesn’t expect to cut rates soon after reaching the cycle peak.
Market Validation
FOMC Press Conference 12/14/22

>> CHAIRMAN POWELL: So if I -- I think I got your question. So, you know, one thing to say is I think our policies in getting into a good place were restrictive and we're getting close to the level of sufficiently restrictive we laid out today what our best estimates are to get there. And I mean, it boils down to how long we think the process is going to take. And of course we're -- we welcome these better inflation reports for the last two months. They're very welcome but I think we're realistic about the broader project. So that's all -- that's the point I'd make. You know, we see goods prices coming down. We understand what will happen with housing services. But the big story would really be the rest of it and there is not much progress there, and that's going to take some time. I think my view and my colleagues' view is this will take time and we'll hold policy for a sustained period so -- so two good monthly reports are, you know, very welcome. Of course they're very welcome. But we need to be honest with ourselves that there is inflation, 12-month core inflation is 6% CPI. That's three times the 2% target. Now it's good to see progress but let's understand we have a long ways to go to get back to price stability.
Read Full Report
December 12, 2022
SGH Insight

...Separately, note that “higher for longer” is more economic guidance than calendar guidance. If the SEP projects larger cuts in 2024 and 2025 than anticipated, this should not be viewed as a rejection of the “higher for longer” story. That story really means the Fed will hold rates higher than typical for a cycle in the sense that it will wait for greater evidence that inflation is decelerating, and the unemployment rate is rising; it’s not a commitment to hold rates high for a specific period. Moreover, it applies to real policy rates as well as nominal. As explained by New York Federal Reserve President John Williams, projected inflation declines in 2023 would tighten financial conditions even if the Fed pauses rate hikes early in the year and the ongoing disinflation in 2024 would need to be met with rate cuts to prevent real financial conditions from tightening even further. In that case, real rates would remain high even if nominal rates fell. The Fed’s resistance to cutting rates is why I anticipate the yield curve will experience a much deeper inversion before this cycle is complete.

...The Fed is poised to raise rates 50bp at this week’s FOMC meeting and project that at least another 50bp of rate hikes remains in this cycle. That projection will place the terminal rate in sight, just two meetings away assuming the Fed downshifts to 25bp at the Jan/Feb meeting. Such a projection is something of an act of faith on the Fed’s part given that incoming data has yet to show all but the earliest signs of the labor market retrenchment the Fed believes necessary to restore price stability. Still, given the speed at which the Fed has raised rates, it would not be surprising to see the impacts of tighter financial conditions limited to only the most interest rate sensitive sectors. We know the Fed is already considering the cumulative tightening to date and policy lags when setting policy and we are looking for signs the Fed is increasingly comfortable viewing rates near 5% as the likely end of this cycle. Note that the Fed hasn’t been trying to guide rate hike expectations substantially higher. We still believe the terminal rate will be 5.125%, but that requires evidence sufficient to leave the Fed confident that the labor market will soften substantially over the next year...

...Bottom Line
The Fed will take another step forward in its campaign to bring policy rates to a sufficiently restrictive level to restore price stability. But with 450bp tightening already completed, the Fed will step down from the blistering 75bp pace of the last four meetings to a still substantial 50bp hike. The Fed’s rate projections will imply that the Fed anticipates the economy will evolve in such a way that the peak of this cycle is not far away. At this point, the data have yet to reveal the substantial rebalancing of the labor market the Fed is hoping to achieve in its quest to restore price stability. Looking for the peak of the cycle under these circumstances very much depends on the Fed having a forecast that includes a very high probability of recession. The Fed is moving closer to that point.

Market Validation
Bloomberg 3/8/2023

The bond market is doubling down on the
prospect of a US recession after Federal Reserve Chair Jerome
Powell warned of a return to bigger interest-rate hikes to cool
inflation and the economy.
As swaps traders price in a full percentage point of Fed
hikes over the next four meetings, the yield on two-year
Treasury notes touched 5.08% on Wednesday, its highest level
since 2007. Critically, longer-dated yields remained stalled,
with the 10-year rate remaining relatively unchanged under 4%
and 30-year bonds having barely budged since Friday.
As a result, the closely-watched spread between 2- and 10-
year yields this week showed a discount larger than a percentage
point for the first time since 1981, when then-Fed Chair Paul
Volcker was engineering hikes that broke the back of double-
digit inflation at the cost of a lengthy recession.

Washington (AP) 12/14/22

-- The Federal Reserve reinforced its inflation fight Wednesday by raising its key interest rate for the seventh time this year and signaling more hikes to come. But the Fed announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing.
The Fed boosted its benchmark rate a half-point to a range of 4.25% to 4.5%, its highest level in 15 years. Though lower than its previous three-quarter-point hikes, the latest move will further increase the costs of many consumer and business loans and the risk of a recession.
The policymakers also forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023. That suggests that the Fed is poised to raise its benchmark rate by an additional three-quarters of a point and leave it there through next year.
In its updated forecasts, the Fed’s policymakers predicted slower growth and higher unemployment for next year and 2024. The unemployment rate is envisioned to jump to 4.6% by the end of 2023, from 3.7% today. That would mark a significant increase in joblessness that typically would reflect a recession.
Consistent with a sharp slowdown, the officials also projected that the economy will barely grow next year, expanding just 0.5%, less than half the forecast it had made in September.

Bloomberg 12/13/22

A dovish post-CPI repricing in the Fed-dated swaps market has seen the odds now favoring a downgrade to a 25bp rate hike move as early as the February policy meeting.
Swaps are still solidly pricing in a 50bp move for Wednesday’s policy announcement, little changed on the day but now an additional 84bp of hikes are priced for the February meeting, down from 91bp Monday close
An 84bp hike premium for the meeting consistent with a 50bp move for December and then 34bp additional priced for the Feb. decision
Further out, Fed peak policy rate has now dropped to around 4.82% consistent with below 100bp of additional hikes; consistent with the Fed pausing in the May meeting next year after 50bp, 25bp and 25bp hikes over the next three meetings
Read Full Report
December 09, 2022
SGH Insight
The United Kingdom’s ongoing battle with inflation is likely to see the Bank of England (BOE) raise rates 50 basis points to 3.5% at next week’s meeting despite concerns that tighter policy threatens to deepen a looming recession.
The UK has the most to do among the major central banks but also faces the greatest risk of recession. The BOE raised rates 75bp in November as inflation continued to surge higher than officials expected. It has raised rates eight times in the past year to 3% in an effort to avert a wage-price spiral.
At the time of the November meeting the BOE’s chief economist Huw Pill indicated there was more work to do to guide prices back to the Bank’s mandated 2% target over time. UK inflation is running at 11.1% – five times the target.
Governor Andrew Bailey’s proposal to the December 15 meeting will likely draw at least two dissents from committee members. One will be from Silvana Tenreyro who has consistently fought larger increments through the central bank’s tightening cycle. Also, the Bank’s latest addition to the committee this year, Swati Dhingra argued in an interview published on Saturday that higher interest rates could lead to a deeper and longer recession.
Dhingra believes there are few signs that demands for higher wages risk a wage-price spiral. In contrast others on the committee like external BOE rate setter Catherine Mann worry about what she sees as higher inflation expectations already having become embedded into psychology. Mann wants rising inflation dynamics stamped with larger moves to avoid the Bank having to inflict greater pain via a severely restrictive policy setting later.
Market Validation
Bloomberg 12/15/22

The Bank of England raised interest rates for a ninth time in a row to a 14-year high of 3.5%, pressing ahead with efforts to tame sky-high inflation.
The nine-member Monetary Policy Committee split three ways on the decision as officials tried to balance the risk of inflation getting entrenched against squeezing too hard on growth just as the economy enters a recession.
Six members including Governor Andrew Bailey voted for the half-point rise. Catherine Mann favored three-quarters of a point, while Silvana Tenreyro and Swati Dhingra backed leaving rates unchanged.
Read Full Report
December 05, 2022
SGH Insight
The Fed is gearing up for a 50bp rate hike at next week’s meeting and given the repeated guidance of a “somewhat” higher terminal rate, we anticipate the peak rate implied by the SEP will rise 25bp compared to September. The risk to this outlook is a 50bp increase in the terminal rate. Either way, we still can’t yet guide our expected terminal rate higher than 5.125%.
Market Validation
Bloomberg 12/13/22

A dovish post-CPI repricing in the Fed-dated swaps market has seen the odds now favoring a downgrade to a 25bp rate hike move as early as the February policy meeting.
Swaps are still solidly pricing in a 50bp move for Wednesday’s policy announcement, little changed on the day but now an additional 84bp of hikes are priced for the February meeting, down from 91bp Monday close
An 84bp hike premium for the meeting consistent with a 50bp move for December and then 34bp additional priced for the Feb. decision
Further out, Fed peak policy rate has now dropped to around 4.82% consistent with below 100bp of additional hikes; consistent with the Fed pausing in the May meeting next year after 50bp, 25bp and 25bp hikes over the next three meetings
Read Full Report
December 05, 2022
SGH Insight
Xi and MBS will both confirm the increase in the use of their respective local currencies (RMB and SAR) for settlement in bilateral trade, especially in crude oil trade.
Beijing expects that the first summit between China and the Arab League (League of Arab States – LAS) will mark the entry by both sides into the stage of “all-round cooperation” in China’s Belt and Road Initiative. The summit between China and the Gulf Cooperation Council will mark the final stage of negotiations on a free trade agreement between the two sides. The summit between Xi and Saudi Arabia’s MBS will mark a new stage of “comprehensive strategic partnership” between the two countries including on MBS’ controversial NEOM city project in the desert, oil and gas resources, clean energy, e-commerce, high technology, people to people exchanges, and national defense.
Market Validation
Bloomberg 12/8/22

Xi Says China Willing to Boost Crude Oil Trade With Saudi Arabia

China is willing to strengthen energy policy coordination, expand crude oil trade, and strengthen cooperation in energy exploration and development with Saudi Arabia, Chinese president Xi Jinping told Saudi’s Crown Prince Mohammed bin Salman at a meeting on Thursday, according to a statement by Chinese foreign ministry.
China supports the kingdom’s Vision 2030 and Middle East Green initiatives while implementing connection of the vision with China’s Belt and Road Initiative
China willing to deepen cooperation in construction of production capacity and infrastructure, improve trade, investment and financial cooperation, expand cooperation in e-commerce, digital economy, clean energy, advanced technology, and aerospace research and development

Bloomberg 12/9/22

Xi Says China to Make Efforts on Oil & Gas Trade Yuan Settlement

China is willing to make efforts with Gulf Cooperation Council (GCC) countries in the next three to five years in key areas including energy cooperation “new pattern”, President Xi Jinping said in a speech at the China-GCC summit in Riyadh on Dec. 9, CCTV reports.
China willing to make efforts in the following areas: continue to increase import of crude oil and liquified natural gas from GCC countries
Use Chinese currency for oil & gas trade settlement
Set up joint forum on the peaceful uses of nuclear technology
Build up co-investment federation to support cooperation of sovereign investment funds
Co-build big data and cloud computing center and implement 10 digital economy projects
Cooperate on aerospace area; welcomes astronauts of GCC countries to enter Chinese space station and study the establishment of joint lunar and space exploration center
Read Full Report
December 01, 2022
SGH Insight
Impatient that Canadian inflation is not yet broadly declining, the Bank of Canada (BOC) will likely deliver its last 50bp of the cycle when the governing council meets next week, taking its official cash rate to 4.25%.
Governor Tiff Macklem struck a mostly hawkish tone in testimony to a parliamentary committee last week when he reiterated that the economy remains overheated with inflation too high and still broad based, reflecting large increases in prices of goods and services.
While Macklem’s lean was hawkish regarding the December 7 meeting outcome, the tone of his broader comments is beginning to show increased sensitivity to the potential end point of the Canadian policy cycle.
That means the BOC may opt to hold rates at 4.25% to wait for prior tightening to show up in the data.
“We are trying to balance the risks of under- and over-tightening,” Macklem told the hearing.
Market Validation
Dow Jones 12/7/22

The Bank of Canada on Wednesday raised its main interest rate by a half-percentage point to contain elevated inflation, and signaled it's at or near the end of its rapid-fire tightening campaign because of slowing growth.
The Bank of Canada increased its target for the overnight rate by a half-percentage point from 3.75% to 4.25%, the highest level in nearly 15 years. The Bank of Canada said any future policy decisions would be guided by incoming data.
"Looking ahead, the governing council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target," the central bank said in a statement outlining its decision.

Read Full Report
December 01, 2022
SGH Insight
A surprising dip in a new monthly measure of Australia’s consumer inflation will not knock the Reserve Bank of Australia (RBA) off its path to nudge rates another 25 basis points next week to 3.10% though it will likely tee up a possible pause in hikes early next year.
The headline annual monthly inflation rate eased to 6.9% in October from 7.3% in September due to smaller rises in prices of fruit, vegetables, and travel, while the trimmed mean measure eased to 5.3% from 5.4% in September.
Still given inflation has not yet peaked, the RBA is keeping its options open.
“Acknowledging the uncertainty, (RBA board) members did not rule out returning to larger increases if the situation warranted,” the Bank said in the minutes of its November 1 meeting.
“Conversely, the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook. Interest rates are not on a pre-set path.”
Even if the RBA lifts the cash rate again in the new year it is looking to pause to allow the full impact of prior tightening to work its way through the economy.
Market Validation
Bloomberg 12/20/22

Australia’s central bank considered pausing
its policy tightening cycle this month but decided against it as
incoming economic data didn’t yet warrant a change of stance,
minutes of the Dec. 6 meeting showed.
The Reserve Bank’s board raised interest rates by a
quarter-percentage point to 3.1% two weeks ago after considering
three options –- 25 basis points, 50 or a pause, the minutes
released Tuesday in Sydney showed.
This is the first time during the RBA’s eight-month
tightening cycle that board members put the case for no change
on the table. The discussions come as a majority of economists
see two more quarter-point hikes in 2023, taking the cash rate
to 3.6%.

Bloomberg 12/6/22

Australia’s central bank raised its key
interest rate for an eighth consecutive month and said it
expects to tighten policy further as it seeks to cool the
hottest inflation in three decades.
The Reserve Bank increased its cash rate by a quarter-
percentage point to 3.1%, the highest level since November 2012,
at its final meeting of 2022. Tuesday’s widely anticipated
decision brings the RBA’s cumulative hikes since May to 3
percentage points, the sharpest annual tightening since 1989.
“The board expects to increase interest rates further over
the period ahead, but it is not on a pre-set course,”

Read Full Report
November 30, 2022
SGH Insight
The three main European Union countries that have been holding out for a lower, more aggressive price cap by the EU and G7 allies on imports of Russian oil via tanker – Poland, Lithuania, and Estonia – have made the case that the $65-70 per barrel price cap presented by the European Commission to EU governments on behalf of the G7 last Wednesday was a level fixed in September, when the Russian Urals crude traded on the market between $68 and $76.
This reflected a U.S. administration view apparently that a price cap of about 5% below the market price would be just right as it would be a level at which Russia could swallow the discount, but not low enough to make it worthwhile for Moscow to set up elaborate by-passing and smuggling schemes.
Since then, however, Russian crude prices have been trending down to below $65, so setting a price cap at that level does not make much sense — it will not be a cap at all.
Moreover, these hawks point out that Russia’s 2023 budget was built on the assumption that it would be able to sell its oil at $65 per barrel, so setting the limit at that level would do nothing in terms of diminishing the Kremlin’s expected ability to finance its war in Ukraine — Putin would get exactly the price he planned for.
Indeed, these three countries say that Russian production costs are $20-25 per barrel, so even with a cap at $30 there would be profit for Moscow. That said, EU officials believe Washington would be amenable to a price cap in the $50-$60 per barrel range, leaving the impression that this is where they expect the landing zone to be.
Talks between EU countries and G7 capitals will continue this week. They are likely to continue through the weekend, but ambassadors involved in the discussions seemed cautiously optimistic a deal is possible before their December 5th deadline in time for the rollout of what was originally a ban on Russian sea-borne oil imports.

Market Validation
Bloomberg 12/2/22

EU Agrees to Set $60 Price Cap Level for Russian Oil Exports

The European Union agreed to put a price cap on Russian oil at $60 a barrel, paving the way for a wider Group of Seven deal, according to a Polish diplomat.
The price is higher than where Russia already sells most of its crude. That’s because one of the main aims of the measure is to try to keep Russian oil flowing to global markets. But it’s less generous than an earlier proposal after pressure from Poland and the Baltic countries.
After long negotiations, those countries succeeded in securing additional conditions aimed at punishing Moscow, including a mechanism that would allow for revisions of the price every two months, There’s also a plan to make sure any resetting of the cap should leave it at least 5% below average market rates.
Read Full Report
November 30, 2022
SGH Insight
There is a major disconnect between market expectations and pricing, and the policy rate European Central Bank officials increasingly feel will be needed to bring inflation back down to their 2% target.

Markets have for some time converged, and remain converged, around a 3% “terminal rate” for this hiking cycle, pricing it today at around 2.8% after the drop in eurozone headline inflation readings from 10.6% in October to 10.0% in November.

As things stand, however, the ECB is likely to raise rates into the 3.5% to 4.0% range next year and look to keep them there for a while to bring inflation back down to target...

...Similarly, while analysts are keenly focused on the interplay and political tradeoffs between the start of the ECB’s balance sheet reduction and magnitude of the next interest rate hike, that kind of fine tuning of policy is now a bit of a red herring.

We expect that the ECB will not dally around with a previously planned, and widely expected, two-step process of rolling out the broad contours for shrinking its balance sheet on December 15, to be agreed and implemented at their subsequent meeting in February (some analysts are expecting even later than that).

We expect the ECB will move forward imminently with its balance sheet reduction program, and will agree, announce, and roll out the details of that program at its upcoming December 15 meeting, to take effect as soon as feasible...

Market Validation
Bloomberg 2/24/23

European bonds tumbled and money market traders added to European Central Bank rate hike bets after data showed the US economy is running hotter than expected.
German two-year yields — among the most sensitive to changes in monetary policy — rose as much as 13 basis points on Friday to above 3% for the first time since 2008. Money markets now price the ECB deposit rate to peak at around 3.87% later this year compared to around 3.5% at the beginning of the year.

Bloomberg 12/15/22


Yet more tough language from Lagarde as she again flags the possibility of several 50 basis points hikes. It shouldn’t be regarded as the new normal, but in current circumstances it’s the right approach, she says. “We need to take this fight and continue the battle against inflation.”

In response to Alex’s first question whether 3% is a fair assumption for a terminal rate, Lagarde says that staff projections do not allow a return to 2% inflation target in a timely manner. More needs to be done and as a result new market expectations will “hopefully” be embedded in future projections, she says.

ECB Monetary policy statement 12/15/22

The key ECB interest rates are the Governing Council’s primary tool for setting the monetary policy stance. The Governing Council today also discussed principles for normalising the Eurosystem’s monetary policy securities holdings. From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

Read Full Report
November 28, 2022
SGH Insight
The Fed is poised to hike rates 50bp at the upcoming FOMC meeting. The Fed will hike rates at subsequent meetings, but we still don’t see a clear reason to expect the terminal rate will be greater than 5.125%. We expect Fedspeak, particularly from Powell, will reiterate that slowing the pace of rate hikes does not mean any less commitment to the inflation target. We think his comments on the labor market will emphasize that although there are signs of cooling, the labor market remains overheated. The Fed would like to hold financial conditions steady here, but if market participants remain predominantly focused on the potential for a Fed pause and concerns about recession, any jawboning intended to keep the “higher for longer” story may fall on deaf ears.
Market Validation
Bloomberg 12/13/22

A dovish post-CPI repricing in the Fed-dated swaps market has seen the odds now favoring a downgrade to a 25bp rate hike move as early as the February policy meeting.
Swaps are still solidly pricing in a 50bp move for Wednesday’s policy announcement, little changed on the day but now an additional 84bp of hikes are priced for the February meeting, down from 91bp Monday close
An 84bp hike premium for the meeting consistent with a 50bp move for December and then 34bp additional priced for the Feb. decision
Further out, Fed peak policy rate has now dropped to around 4.82% consistent with below 100bp of additional hikes; consistent with the Fed pausing in the May meeting next year after 50bp, 25bp and 25bp hikes over the next three meetings

Bloomberg 11/30/22

Treasuries Pare Losses After Powell; Target Peak Priced Below 5%

Treasuries pare declines, led by front and belly of the curve, after Fed Chair Jerome Powell says the time for moderating hike pace may come as soon as December.
Treasury yields flip to richer on the day at the long-end of the curve, while 2-year yields moved to be 1bp up on the day and and well off session highs; 2s10s and 5s30s spreads pared earlier flattening move although remain tighter on the day
Over the release volumes spike with around 40k March 10-year note futures trading in move from around 112-21 up to 113-01 -- price action remains inside session range however
Swaps showed a dialing back of expectations for Fed terminal rate to just under 5%, down from level pre-remarks and similar to end of prior day

In a wide-ranging speech about the outlook for monetary policy, Powell said that in order to bring inflation back down to the Fed’s 2 per cent target, the labour market must become substantially softer and there would need to be a “sustained period of below-trend growth”. He said that job gains still remain far too high, at about 290,000 positions per month over the past three months. And wage growth remains well above than the figure that would correspond to inflation falling back to target, he added.
Read Full Report
November 28, 2022
SGH Insight
European Central Bank Executive Board member Isabel Schnabel, who we have long considered to be the most important and influential thought leader on the Board in support of President Christine Lagarde, delivered a speech over the US Thanksgiving holiday in which she laid out the case for another aggressive rate hike when the ECB Governing Council next meets on December 15.

Some of the financial press summarized her speech as simply stating that “incoming data so far suggest the room for slowing down the pace of interest rates remains limited,” but in our view Schnabel went significantly farther than that, and the real message of this important speech may have been lost in the holiday markets.

In her keynote speech on Thursday at the Bank of England Watchers conference, focused on the interplay between monetary and fiscal policy, we believe Schnabel intended to make a full-throated case to the public, markets, and to her fellow policymakers for more frontloading of rate hikes, meaning another 75 bp hike in December.
Market Validation
1/19/23 Market Watch

Lagarde tells traders they are wrong to bet on slower pace of ECB interest rate rises

Benchmark European bond yields rose and the euro was firm after Christine Lagarde told traders they were wrong to bet the European Central Bank is about to slow the pace of interest rate rises.
The ECB president pushed back against reports earlier this week that suggested the central bank might trim its interest rate hikes from 50 basis points to 25 basis points at its next meeting on February 2nd in response to signs inflationary pressures were easing.
"I would invite [financial markets] to revise their position; they would be well advised to do so," Lagarde told a panel at Davos.

ECB Account of December monetary policy meeting

A large number of members initially expressed a preference for increasing the key ECB interest rates by 75 basis points, as inflation was clearly expected to be too high for too long and prevailing market expectations and financial conditions were plainly inconsistent with a timely return to the ECB’s 2% inflation target. Hence, the worsened inflation outlook required an interest rate hike larger than that priced in by markets. Failing to exceed market expectations could be regarded as confirming market views on the future policy path, which could result in the yield curve not shifting upwards to the extent required to bring inflation back to target. It was argued that, given the unfavourable data and inflation outlook that had become available with the December projections, the Governing Council’s data-dependent, meeting-by-meeting approach required an interest rate increase of the same size as in October to counter an unwarranted loosening of financial conditions and the monetary policy stance. It was maintained that a 75 basis point increase would speak for itself and was preferable to relying on the alternative approach of a 50 basis point move accompanied by strengthened communication on the way forward. A risk management approach to addressing persistent inflation pressures was also seen as calling for decisions that erred on the side of determined action to prevent an unanchoring of inflation expectations. Raising interest rates by less than 75 basis points would send the wrong message and risked being perceived as inconsistent with the 2% inflation target in the medium term, thereby reinforcing the perception of an asymmetry in the Governing Council’s reaction function.
Some of these members, nonetheless, expressed their willingness to agree on a 50 basis point rate rise if a majority were to support the proposal put forward by Mr Lane, taking into account the strengthened communication on the Governing Council’s policy intentions and the enhanced message that the Governing Council would continue raising rates significantly at a sustained pace, which were also part of the proposal. This was in some ways seen as broadly equivalent to raising rates by 75 basis points at the present meeting, because a less frontloaded but steadier approach to bringing interest rates to restrictive levels could be seen as consistent with the more persistent nature of the inflation process and continued elevated uncertainty.
Taking all into account, a broad majority of members supported Mr Lane’s proposal to raise the key ECB interest rates by 50 basis points and to communicate that interest rates would still have to rise significantly at a steady pace to reach levels that were sufficiently restrictive to ensure a timely return of inflation to the ECB’s 2% medium-term target.
Read Full Report
November 22, 2022
SGH Insight
In yesterday’s report, (SGH 11/22/22, “ECB: Frontloading Pressures”), we outlined ongoing pressures beneath the surface across the ECB to continue the process of frontloading interest rate hikes. And while 50bps is by all standard measures an aggressive move, we wrote that what had been seen to date in markets and by analysts as a lack of agitation from ECB hawks for another 75bp hike at their next meeting should not be interpreted to mean there might not end up being a good deal of support for that by December 15, and that 75 would be a serious option on the table, and that the 50bp hike assumed by many would be in fact a razor’s edge decision in light of continued problematic inflation figures and what we expect will be another upside revision to the ECB’s inflation forecast at the same meeting.

We are now switching our call from leaning 50 (“just barely”), to leaning to 75 for December, under the assumption that some last few data releases, and most importantly the ECB staff forecast revision on December 15, pan out broadly along the lines we expect.
Market Validation
Bloomberg 11/25/22

Eurozone Bonds Drop as More Hawkish ECB Comments Stall Rally

A rally in European bonds ground to a halt
on Friday, with investors betting on a faster pace of interest
rate hikes as they digested more hawkish comments from central
bank policy makers.
German 10-year yields rose as much as 13 basis points to
1.98%, trimming what’s set to be the third weekly drop in
European Central Bank policymaker Isabel Schnabel signaled
on Thursday that it may be premature to scale back rate
increases, pushing back against a market watching for signs that
global monetary policy tightening can ease. ECB Governing
Council member Madis Muller echoed the sentiment on Friday,
saying that the main risk in the battle to quench record
inflation is halting the hiking process too soon.

Read Full Report
November 21, 2022
SGH Insight
The Fed plans to raise its policy rate to a level that is sufficiently restrictive to restrain the demand side of the economy and put downward pressure on what it views as the persistent component of elevated inflation. The Fed does not know exactly what the appropriate level of the terminal rate will be, but given the cumulative tightening already in place, the Fed is ready to downshift to 50bp-increments at the December FOMC meeting. The Fed does not want to see financial conditions ease markedly now, especially if the easing reflects a misunderstanding of the Fed’s reaction function. From the Fed’s perspective, the market reaction to the October CPI report, specifically the equity rally and decline in longer term interest rates, was premature and does not recognize the Fed’s belief that labor market restraint is a prerequisite for restoring price stability. We expect the Fed will emphasize that it expects to hold policy rates restrictive until labor markets soften substantially to try to front run a soft November CPI report.
Market Validation
Bloomberg 11/26/22

Federal Reserve officials concluded earlier
this month that the central bank should soon moderate the pace
of interest-rate increases to mitigate risks of overtightening,
signaling they were leaning toward downshifting to a 50 basis-
point hike in December.
“A substantial majority of participants judged that a
slowing in the pace of increase would likely soon be
appropriate,” according to minutes from their Nov. 1-2 gathering
released Wednesday in Washington.
In addition, while Chair Jerome Powell said during his
post-meeting press conference that rates will probably
ultimately go higher than officials’ September forecasts
indicated, Wednesday’s report gave a more nuanced take:
“Various” officials -- a descriptor not commonly used in the
minutes -- had concluded that rates would ultimately peak at a
higher level than previously expected.
Read Full Report
November 21, 2022
SGH Insight
The preference for 50 in December should not be news to many followers of the ECB, nor to our readers, and it is not the story for today.
What is newsworthy at this juncture is that the arguments and support for a continued front loading of rate hikes are under the surface still very much alive.
Indeed, the lack of public agitation for a 75bp hike in December from traditional hawks within the Council should not be interpreted to mean it will not be on the table as a serious option on December 15. Whether it carries the day remains to be seen, but what appears certain is that the glidepath from 75 to 50 to 25bp hikes in 2023 as envisioned by many ECB officials is very much in doubt.
Market Validation
Bloomberg 11/22/22

The European Central Bank will deliver
another “robust” interest-rate increase next month, though it’s
premature to settle on its size just yet, according to
Bundesbank President Joachim Nagel.
Inflation data due before the Governing Council’s Dec.
14-15 meeting and new economic projections through 2025 will be
key to determining whether a third straight 75 basis-point hike
is needed to tackle record inflation, or whether a half-point
step is sufficient, Nagel told journalists in Frankfurt.
Either way, the ECB’s efforts on rates should be
complemented by a reduction in the stash of bonds it bought as
stimulus during recent crises, starting early next year, he
Read Full Report
November 14, 2022
SGH Insight
Bank of Japan Governor Haruhiko Kuroda has initiated a gradual and calculated handover to his successor by softening the path to an eventual exit from ultra easy monetary policy, including specifically Yield Curve Control (YCC), which officials envisage they can accomplish by mid next year.
The complex timeline for transition is expected to navigate policy through a seamless hand off in the central bank leadership, and it is also hoped a modification to policy will be made smoother if it coincides with a pause in the US tightening cycle to minimize the potential disruption to the global and domestic rates markets.
Last month BOJ policymakers acknowledged in a summary of their meeting that they would intensify internal work on the side effects of prolonged easing and the impact of a future exit from easy conditions.
The shift reflects the extent of interagency coordination and behind-the-scenes planning for an eventual change in policy. Kuroda will likely continue to hint at planning efforts to exit YCC before a December succession announcement so that his successor can then start publicly describing the plans.
Market Validation
Bloomberg 12/20/22

Bank of Japan Governor Haruhiko Kuroda just
gave investors a glimpse of what to expect when the world’s
boldest experiment with ultra-loose monetary policy comes to an
In the face of sustained market pressure, Kuroda shocked
markets Tuesday by saying he’ll now allow Japan’s 10-year bond
yields to rise to around 0.5%, double the previous upper limit
of 0.25%.
Whether this is a strategic tweak to buy time for his
yield-curve control settings until his decade-long term ends in
April or the start of the end for his unprecedented monetary
easing remains to be seen.
But one thing is clear: a crack has opened that markets
around the world will keep prising in the weeks and months
“This is a step toward an exit, whatever the BOJ calls it,”
said Masamichi Adachi, chief Japan economist at UBS Securities
and a former BOJ official. “This opens the door to a chance of a
rate hike in 2023 under a new governorship.”
Read Full Report
November 14, 2022
SGH Insight
The October CPI report reinforced our caution last week about pushing the expected terminal rate for the Fed’s tightening cycle above 5.125% for the time being. Even if like us you believe that inflation will not be dispelled quite so easily, there is simply too much risk of reports like this between now and next May to have much visibility beyond 5.125% for the time being. Indeed, now there is a path to 4.625%, although we think that is unlikely. The CPI report locked in expectations that the Fed will step down to a 50bp rate hike in December, and that is widely seen as a precursor to stepping down to 25bp, and then to a pause. We will be living with this CPI report until the next one is released in December.
Market Validation
Bloomberg 11/17/22

Fed Daly Says Rate Peak Between 4.75%-5.25% a Reasonable Range

Federal Reserve Bank of San Francisco President Mary Daly said 4.75% to 5.25% was a “reasonable” range for where the US central bank could lift interest rates and then go on hold.
“Somewhere between 4.75 and 5.25 seems a reasonable place to think about as we go into the next meeting,” Daly said in a Wednesday interview on CNBC. “And so that does put it in the line of sight that we would get to a point where we would raise and hold.”
Read Full Report
November 14, 2022
SGH Insight
Beijing expects the hawkish US Taiwan Policy Act to pass in Congress most likely in the spring of next year once the new legislature is in session. Officials also note that House GOP leader Kevin McCarthy has declared that if the Republicans win the House majority he plans to create a China select committee to confront China in all areas. They expect GOP focus and pressure to extend far beyond the planned select committee, with weapons sales to Taiwan as a front and center focus for the Republicans.
Furthermore, they believe that as long as the Republicans win the House majority, McCarthy or whoever may end up as House speaker will visit Taiwan during their two-year term, compounding the escalation that followed the visit this year by Speaker Nancy Pelosi to Taipei.
Market Validation
Reuters 11/21/22

Kevin McCarthy, the Republican leader in the U.S. House of Representatives, said on Sunday he would form a select committee on China if he is elected speaker of the chamber, accusing the Biden administration of not standing up to Beijing.
"China is the No. 1 country when it comes to intellectual property theft," he told Fox News in an interview.
"We will put a stop to this and no longer allow the administration to sit back and let China do what they are doing to America."
Read Full Report
November 07, 2022
SGH Insight
The Fed is heading toward a 50bp rate hike in December, and we think odds favor pushing through another 50bp rate hike at the January/February FOMC meeting. Still, the Fed does appear to be looking for a place to pause and although Federal Reserve Chair Jerome Powell guided the terminal rate higher again last week, we can see the makings of a peak of this cycle if core inflation does not accelerate, but it will be higher than the doves think is appropriate. For us, an important question is whether Powell pushes that peak past the point where “higher for longer” is no longer a viable policy option.
Market Validation
Bloomberg 11/10/22

Treasuries rise sharply to fresh highs of the day, soaring after October CPI data prints below estimate. Fed-dated OIS market drops sharply, almost pricing in a 50bp move at the December Fed meeting instead of another 75bp hike.
Futures volumes surge with almost 100k 10-year note contracts trading in the post-CPI bid; 10-year yields drop to around 3.94%, richer by 15bp on the day while 2s10s spread re-steepens
Fed-dated OIS pricing in 52bp rate hikes for the December meeting vs 58bp priced Wednesday close; further out Fed peak drops to 4.88% by May next year, down from 5.05% prior close
Read Full Report